# Petition for Writ of Certiorari — Balcor Film Investors v. Eckstein > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_0819%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1994 - **Citation:** 510 U.S. 1073 ## Text 93-82% No. Ur TRE BLERK IN THE Supreme Court of the United States OCTOBER TERM, 1993 BALCOR FILM INVESTORS, et al., Petitioners, ROBERT ECKSTEIN and SYLVIA ECKSTEIN, et al., Respondents. 355 South Grand Avenue 39th Floor Los Angeles, California 90071 (213) 617-7070 Petition for Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit PETITION FOR WRIT OF CERTIORARI H. NICHOLAS BERBERIAN STEVEN L. BASHWINER RoBERT J. MANDEL Counsel of Record NEAL GERBER & EISENBERG Mary ELLEN HENNESSY Two North LaSalle Street Amy E. SMITH Suite 2200 KATTEN MUCHIN & ZAVIS Chicago, Illinois 60602 525 West Monroe Street (312) 269-8000 Suite 1600 Dennis M. PeRLuss Chicago, Illinois 60661 HUFSTEDLER, KAUS . (312) 902-5200 & ETTINGER Attorneys for Petitioners Midwest Law Printing Co., Chicago 60611, (312) 321-0220 i QUESTIONS PRESENTED 1. Whether the Seventh Circuit correctly interpreted Sec- tion 27A of the Securities Exchange Act of 1934 as codify- ing a “non-uniform federal law”’ requiring a federal court to apply the statute of limitations law of the transferor forum, and not its own statute of limitations, to a federal question case transferred pursuant to 28 U.S.C. § 1404(a), in light of a conflicting interpretation of Section 27A by the United States Court of Appeals for the Second Cir- cuit in Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993), and this Court’s decision in DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151 (1983), which held that the statute of limitations question in a federal ques- tion case is itself a federal question? 2. Whether the holdings of Ferens v. John Deere Co., 494 U.S. 576 (1990), and Van Dusen v. Barrack, 376 U.S. 612 (1964)—that a transferee court must follow the rules of the transferor forum pursuant to 28 U.S.C. § 1404(a)— apply whenever the law of the United States is “geo- graphically non-uniform,” regardless of whether the ac- tion at issue arises out of a federal question or diversity claim? 3. Whether a litigant’s decision to file in one federal forum as opposed to another constitutes sufficient “reli- ance” under Chevron Oil v. Huson, 404 U.S. 97 (1971), and McCool v. Strata Oil Co., 972 F.2d 1452 (7th Cir. 1992), to avoid retroactive application of subsequent deci- sions affecting the limitations period in the chosen forum? il LIST OF PARTIES Petitioners/defendants include Balcor Film Investors, Balcor Entertainment Company, Ltd., The Balcor Com- pany, f/k/a Balcor/American Express, Inc., Balcor Securi- ties Company, New World Pictures, Ltd., New World Entertainment, Ltd., The American Express Company, Lehman Brothers Inc., f/k/a Shearson Lehman Hutton, Inc., f/k/a Shearson Lehman Brothers, Ine., and f/k/a Shearson Lehman/American Express, Inc., Jerry M. Reins- dorf, Robert A. Judelson, James E. Finley, Gregory S. Junkin, Barry R. Jackson, Lawrence L. Kuppin, Robert Rehme and Harry E. Sloan. Respondents/plaintiffs include Robert Eckstein, Sylvia Eckstein, Ralph Majeski, Joseph Yach, Janice Waisman, Larry R. Peterson, Thomas Weil, Lee Aldridge, Randy Karpinsky, Kenneth Kulas, Robb S. Elliott and Raymond Harding. The following is furnished in compliance with Supreme Court Rule 29.1: Balcor Entertainment Company, Ltd. Parent Company - The Balcor Company Subsidiaries (except wholly owned) - None The Balcor Company Parent Company - National Express Company Subsidiaries (except wholly owned) - None Baleor Securities Company Parent Company - The Balcor Company Subsidiaries (except wholly owned) - None New World Entertainment, Ltd. Parent Company - Andrews Group Incorporated Subsidiaries (except wholly owned) - None New World Pictures, Ltd. See New World Entertainment, Ltd. i] The American Express Company Parent Company - None Subsidiaries (except wholly owned) - First Data Corp. Lehman Brothers Inc. Parent Company - The American Express Company Subsidiaries (except wholly owned) - None lV TABLE OF CONTENTS PAGE QUESTIONS PRESENTED .................. i ee ee aca c seca un scents cece wees ii TABLE OF AUTHORITIES ................. vi SE SE ou eu idawananddweewawins l PT e560 bk cae ssev enn ens ] p¥ valyy - Big oi A y 4: Sen 2 STATEMENT OF THE CASE ............... 3 REASONS FOR GRANTING THE WRIT .... 7 Ns danas nGiekos srnGsuke tL oeaasee cs 7 I. THE DECISION BELOW CONFLICTS WITH THE DECISION OF THE SECOND CIRCUIT gs POPPE Peer eT ee eT Pee ereT 8 IT. THE SEVENTH CIRCUIT’S INTERPRETA- TION OF SECTION 27A IS INCONSISTENT WITH DELCOSTELLO AND RAISES QUES- TIONS REGARDING THE PROPER SCOPE OF VAN DUSEN AND FERENS .............. 9 [APL MINE o do ceasidavesenadecssakcaewnes 15 V APPENDIX Opinion of the United States Court of Appeals for the Seventh Circuit (dated August 20, 1993) .. Judgment of the United States Court of Appeals for the Seventh Circuit (dated August 20, 1993) . Decision and Order of the United States District Court for the Eastern District of Wisconsin (dated March 11, 1992).................... Judgments of the United States District Court for the Eastern District of Wisconsin (dated March 11, 1992) OP ORO ARKAARAA EL AASABDA OH 4S 28-2 OO Oo Oe APP. PAGE vi TABLE OF AUTHORITIES Cases: Page Chevron Oil v. Huson, 404 U.S. 97 (1971) ... 6,8, 10, 14 DelCostello v. International Brotherhood of Team- sters, 462 U.S. 151 (1983) ........... 7,9, 11, 12, 13 Eckstein v. Balcor Film Investors, {Current BindeF] Fed. Sec. L. Rep. (CCH) ¢ 97,712 (7th Cir. Aug. My DOSED cv ovuncccstndoncvasstacksesuleeen passim Erie R. Co. v. Thompkins, 304 U.S. 64 (1938) ... 13 Ferens v. John Deere Co., 494 U.S. 576 (1990) ... In re Balcor Film Investors Sec. Litig., No. 805 aaa Le, De Bee vécwessesscuneeeees 4 In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C. Cir. 1987), affd sub nom. Chan v. Korean Air Lines, Ltd., 490 U.S. 122 (1989) ... 5, 7, 12, 13, 14 In re Pittsburgh & L.E.R. Co. Sec. & Antitrust Litig., 543 F.2d 1058 (3d Cir. 1976) ........ 12 I.N.S. v. Cardoza Fonseca, 480 U.S. 421 (1987) ... 1] Mayeski v. Balcor Entertainment Co., Ltd., 740 F. Supp. 563 (E.D. Wis. 1990) ................ 3 Mayeski v. Balcor Entertainment Co., Ltd., 134 fei Fi aie ee Ree 4 Mayeski v. Balcor Entertainment Co., Ltd., 786 F Supp. 1458 (E.D. Wis. 1992) ............... l McCool v. Strata Oil Co., 972 F.2d 1452 (7th Cir. HOOD 6.06 Bd evscaciveneseueeseen Caanscesues? 6, 10 Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993) .. neta ew eeenaneeeeheceua edie 7, 8, 9, 13, 14 a vil Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990), cert. denied, 111 S. Ct. 2887 SP beck ssbnnendnteabsacieeesscnecs 5, 6, 10 Tyler v. U.S., 929 F.2d 451 (9th Cir. 1991) .... 11 Van Dusen v. Barrack, 376 U.S. 612 (1964)... Sidbbeesnstardsagadeveres tee 5d, 6, 7, 9, 12, 13, 14 Statutes: Se SRE Se OD <6 ccccccectsbnaesauden passim Sp ay. OE ion unc cddevanedcckwettcen passim Se Gras WED kno acocesecececkhewesceuxeun l 28 U.S.C. § 1404a) ................... 2,4,6,9, 10, 14 BP SEAS PE oc bo cund dacdcenncccencors ind 4, 10 Treatises: Friendly, “The ‘Law of the Circuit’ And All That,” 46 St. John’s L. Rev. 406 (1972) ........... 12 IA J. Moore, Moore’s Federal Practice ¢ 0.345 [4.6] ree rere rn 12 Miscellaneous: 137 Cong. Rec. § 17469-03 (1991) .............. 1] = PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT Baleor Film Investors, Baleor Entertainment Company, Ltd., The Balcor Company, f/k/a Balcor/American Express Inc., Baleor Securities Company, New World Pictures, Ltd., New World Entertainment, Ltd., The American Express Company, Lehman Brothers Inc., f/k/a Shearson Lehman Hutton, Inec., and f/k/a Shearson Lehman/American Ex- press, Inc., Jerry M. Reinsdorf, Robert A. Judelson, James E. Finley, Gregory S. Junkin, Barry R. Jackson, Lawrence L: Kuppin, Robert Rehme and Harry E. Sloan respectfully petition for a writ of certiorari to review the judgment and opinion of the United States Court of Ap- peals for the Seventh Circuit entered in this proceeding on August 20, 1993. OPINIONS BELOW The opinion of the Court of Appeals is reported at [Cur- rent Binder] Fed. Sec. L. Rep. (CCH) 497,712 (7th Cir. Aug. 20, 1993). App. 1-20. The decision of the District Court is reported at 786 F. Supp. 1458 (E.D. Wis. 1992). App. 23-44. j JURISDICTION The judgment of the Court of Appeals was entered on August 20, 1993. App. 21. The jurisdiction of this Court to review that judgment by writ of certiorari is invoked under 28 U.S.C. § 1254(1). — we STATUTES INVOLVED Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), provides in relevant part that It shall be unlawful for any person, directly or in- directly, by the use of any means or instrumentality of interstate commence or of the mails or of any facil- ity of any national securities exchange * * * (b) to use or employ, in connection with the purchase or sale of any security registered on a national se- curities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contradiction of such rules and regulations as the commission may prescribe as necessary or appropri- ate in the public interest or for the protection of in- vestors. Section 27A of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa-1(a), provides in relevant part that The limitation period for any private civil action im- plied under section 78j(b) of this title that was com- menced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactiv- ity, as such laws existed on June 19, 1991. Section 1404(a) of the Judiciary and Judicial Procedure Act, 28 U.S.C. § 1404(a), provides that For the convenience of the parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought. a oe STATEMENT OF THE CASE Majeski v. Balcor Entertainment Company, No. 88 C 1079 (““Mayjeskv’’), was filed by ten Wisconsin investors on October 11, 1988, in the United States District Court for the Eastern District of Wisconsin (“Eastern District of Wisconsin” or the “District Court”) as a putative class action on behalf of all persons who purchased limited part- nership interests in Balcor Film Investors (“BFI’’). BFI was a limited partnership formed in 1984 to produce and distribute low-budget movies pursuant to an agreement with New World Entertainment, Ltd. (“New World’’). Majeski’s Amended Complaint asserted claims under Sec- tion 10(b) of the Securities Exchange Act of 1934, Sec- tions 12(2) and 17 of the Securities Act of 1933 and various common law claims.! In essence, the Majeski plaintiffs alleged that BFI was misrepresented as being a safe and conservative investment, when in fact it was highly specu- lative. Eckstein v. Balcor Film Investors, No. 89 C 1315 (“Eck- stein”), another putative class action also seeking to repre- sent all BFI limited partners, was filed on February 10, 1989 in the United States District Court for the Central District of California (‘Central District of California’’). Eckstein also asserted Section 10(b) and common law claims, although the latter were dismissed swa sponte by the lower California court. The Eckstein Section 10(b) claim alleged a “fraud created the market” theory, assert- 1 The District Court ultimately dismissed the Majeski plaintiffs’ Section 17 and Section 12(2) claims. The District Court dismissed the Section 12(2) claim for failure to adequately plead the one year/three year limitations period set forth in 15 U.S.C. § 77m. Majeski v. Balcor Entertainment Co., Ltd., 740 F. Supp. 563, 566-67 (E.D. Wis. 1990). The Majeski plaintiffs did not seek appel- late review of that decision. a ee ing that, but for the alleged misrepresentations and omis- sions, the BFI offering would not have been successful. Both actions arose from the offering of BFI limited part- nership interests which were sold pursuant to a Prospectus dated January 8, 1985. The offering was limited to investors who met certain financial and suitability requirements and who had no need for liquidity in their investment given the lack of a secondary market for the partnership in- terests. Investors were warned that there could be no assurance that the partnership’s objectives of a return on investment, appreciation in BFI’s investments and tax benefits, would be achieved. In addition, the Prospectus cautioned that an investment in BFI was not only subject to all of the significant risks inherent in an investment in the motion picture industry, but that BFI’s success was also dependent upon the results achieved through New World’s performance in developing, acquiring, producing and distributing the BFI movies. On August 23, 1989, on defendants’ motion, the Judicial Panel for Multidistrict Litigation transferred the Eckstein action to the Eastern District of Wisconsin pursuant to 28 U.S.C. § i pretrial proceedings with Mayeski. In re Balcor Film Investors Sec. Litig., No. 805 (J.P.M.L. Aug. 23, 1989). On February 27, 1991, the Dis- trict Court permanently transferred Eckstein to the Eastern District of Wisconsin pursuant to 28 U.S.C. § 1404(a) and Fed. R. Civ. P. 42(a).2 App. 23 n.1. 2 In the interim, on January 18, 1991, the District Court certified one class of all persons who purchased interests in BFI, and created two separate subclasses—an Eckstein subclass comprised of “‘all persons who purchased [BF1 Interests] without relying on any of the public offering materials” and a Majeski subclass of purchasers who relied on the offering materials in making their investments. Majeski v. Balcor Entertainment Co., Ltd., 134 F.R.D. 240 (E.D. Wis. 1991) (emphasis in original). — —y)— On March 11, 1992, the District Court granted peti- tioners’ motions for summary judgment in both actions. App. 42, 45-46. The District Court found that Short »v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990), cert. denied, 111 S. Ct. 2887 (1991), which adopted the one year/three year statute of limitations for claims brought pursuant to Section 10(b) set forth in 15 U.S.C. § 77m, applied retroactively to both actions and that, as a conse- quence, both actions were time barred. App. 28-29, 40, 42. With reference to Eckstein, the District Court held that under Section 27A and In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C. Cir. 1987) (Ruth B. Ginsberg, J.), aff'd on other grounds sub nom. Chan v. Korean Air Lines, Ltd., 490 U.S. 122 (1989), its own law, and not that of the transferor California forum, applied. App. 26-27. The District Court thus dismissed Eckstein pursuant to Short because it was filed after the three year period of 15 U.S.C. § 77m had expired. App. 42. The District~Court found that the Majeski action was also time barred pur- suant to 15 U.S.C. §77m because it was not filed within one year after plaintiffs were placed on inquiry notice of the alleged fraud. App. 40-41. On August 20, 1993, the Seventh Circuit vacated the District Court’s judgments and remanded the cases for further proceedings. App. 20-21. Specifically, in connec- tion with Eckstein, the Court of Appeals held that the language of Section 27A, requiring the application of the statute of limitations of “the jurisdiction” to Section 10(b) cases filed before June 20, 1991, implied that Section 27A codified ‘geographically non-uniform”’ federal law, i.e., a federal law wherein different federal courts applied differ- ent rules. App. 8-9. Based on that interpretation of Section 27A, and its interpretation of Van Dusen v. Barrack, 376 U.S. 612 (1964), and Ferens v. John Deere Co., 494 U.S. = 516 (1990), the Court of Appeals held that the rule of the transferor forum, rather than its own rule, applied to Eckstein. Thus, the Court declined to impose Short’s one year/three year statute of limitations to Eckstein (since the law of the Central District of California, Eckstein’s forum of filing, applied) and remanded the action. App. 8-9. With regard to Majeski, the Court of Appeals held that Section 27A required the District Court to analyze whether Short’s statute of limitations should be retroactively ap- plied by using the test articulated in Chevron Oil v. Huson, 404 U.S. 97 (1971) (as interpreted by McCool v. Strata Oil Co., 972 F.2d 1452 (7th Cir. 1992)), to deter- | mine if plaintiffs had relied on pre-Short law. Since the District Court did not perform such an analysis, the Court of Appeals vacated the District Court’s judgment and re- manded the case for further proceedings consistent with its opinion. App. 12-13. However, in addressing the issue of what could satisfy Chevron Oil and McCool, the Court of Appeals advised that a plaintiff's decision not to file in one forum and to proceed instead in another could con- stitute sufficient reliance under Chevron Oil to prevent the retroactive application of a new rule of law. App. 13. Petitioners seek review of the Court of Appeals’ hold- ings that: (i) Section 27A, which instructs courts to apply the statute of limitations of “the jurisdiction” to cases filed before June 20, 1991, has codified ‘‘non-uniform federal law” mandating that the law of the transferor forum, and not that of the transferee forum, be applied to cases trans- ferred pursuant to 28 U.S.C. § 1404(a); (ii) the principles of Van Dusen and Ferens apply to both diversity and federal question claims; and (ili) a party’s decision to file in one forum as opposed to another is a sufficient form of reliance under Chevron Oil to avoid retroactive applica- tion of a new rule of law. ee _ REASONS FOR GRANTING THE WRIT Summary The writ should be granted because the Court of Ap- peals’ interpretation of Section 27A has resulted in the application of two different rules of law, that of the Seventh Circuit and that of the Ninth Circuit, to two federal cases which are pending in the same court; have been brought on behalf of the same parties, i.e., all limited partners of Balcor Film Investors; are asserting the same federal claims; and have been consolidated for all pur- poses. The decision of the Seventh Circuit conflicts with Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993), which recognized the unitary nature of federal law and held that a transferee court should apply its own rule of law rather than that of the transferor forum in determining the ap- propriate statute of limitations under Section 27A. In addition, the Court of Appeals’ interpretation of Section 27A is at odds with this Court’s holding in DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151 (1983), in which the Court affirmed the unitary nature of federal statute of limitations questions in finding that the issue of the proper statute of limitations to be applied in a federal question case is itself a federal question. Moreover, the Court of Appeals’ holding extends the diversity principles articulated in Van Dusen and Ferens to federal question cases, a holding also inconsistent with Menowitz and with the decision of United States Court of Appeals for the District of Columbia Circuit in Korean Air Lines. Finally, in interpreting Section 27A as imply- ing a Congressional intent to insure that pre-June 20, 1991 Section 10(b) statute of limitations questions are decided on the basis of where the litigation was filed and could have been filed rather than where it was pending on June exe. 19, 1991, the Court of Appeais has blurred both the line between state and federal law and the meaning of reliance under Chevron Oil. For all these reasons, it is appropriate that this Court grant the petition for writ of certiorari seeking review of the Court of Appeals’ decision. g. THE DECISION BELOW CONFLICTS WITH THE DECI- SION OF THE SECOND CIRCUIT IN MENOWITZ. Section 27A directs that the limitations period applicable to a Section 10{b) case filed prior to June 20, 1991 is the limitations period ‘“‘provided by the laws applicable in the jurisdiction” as they existed on June 19, 1991. 15 U.S.C. §78aa-l(a). When given its natural meaning, the statute refers to “the jurisdiction” in which a Section 10(b) case was pending as of June 19, 1991. In Menowitz, the Second Circuit held that, in determin- ing the statute of limitations law of “the jurisdiction’”’ under Section 27A, a transferee court should apply the law of its own circuit, 7.e., where the transferred case was pending as of June 19, 1991, rather than that of the trans- feror forum in which the case was filed. 991 F.2d at 40. The Seventh Circuit, however, held the reverse, finding that Section 27A requires a transferee court to apply the law of the transferor forum, the jurisdiction in which the case was filed, rather than its own law. App. 8-9. Thus, the decision below conflicts with the decision of the Second Circuit in Menowitz, a conflict which the Seventh Circuit expressly noted in its decision. App. 9 n.7. = Il. THE SEVENTH CIRCUIT’S INTERPRETATION OF SEC- TION 27A IS INCONSISTENT WITH DELCOSTELLO AND RAISES QUESTIONS REGARDING THE PROPER SCOPE OF VAN DUSEN AND FERENS. Not only does the decision below directly conflict with the Second Circuit’s decision in Menowitz, it is inconsis- tent with this Court’s decision in DelCostello and is at odds with the plain language of the statute and its legis- lative history. It also raises serious issues regarding the proper construction and scope of this Court’s decisions in Van Dusen and Ferens, which should be settled by this Court. The court below, without addressing the legislative his- tory of Section 27A or this Court’s decision in DelCostello, came to the conclusion that Congress’ reference to “the jurisdiction” in Section 27A constituted a recognition that, prior to June 20, 1991, different circuits applied different statutes of limitations to Section 10(b) cases and thus codi- fied the “non-uniform” nature of statutes of limitations for Section 10(b) cases filed before June 20, 1991. App. 8 9. It further held that, whenever a federal court is faced with a case transferred under Section 1404(a) wherein such a “non-uniform federal law’”’ is at issue, the diversity prin- ciples articulated in Ferens and Van Dusen pertain. App. 9. Accordingly, even though Eckstein was based on a federal claim, and was pending in “the jurisdiction” of the East- ern District of Wisconsin on June 19, 1991, the Court of Appeals found that Section 27A coupled with Ferens and Van Dusen required the statute of limitations of the transferor forum, the Central District of California, and not that of the transferee forum, to be applied to Eck- stein. Id. = With regard to Majeski, the Court of Appeals found that Section 27A required it to apply the Chevron Oil test to the question of whether Short’s one year/three year limitations period applied retroactively to the Majeski plaintiffs’ clairis. It also found the dispositive question on ‘hat issue to pe: if those plaintiffs had known that Snort would apply to their claims, could and would they have filed within the period of limitations? The Court stated that those plaintiffs might have satisfied Chevron Oil and McCool by filing their action in Wisconsin when they could have chosen to file their action in California. App. 13. The result of the Seventh Circuit’s reasoning is one which is an anathema to the national policy of uniform- ity in the application of federal laws. Eckstein, a Section 10(b) case with no pendent state law claims, was trans- ferred to the Eastern District of Wisconsin pursuant to 28 U.S.C. § 1407(a) for coordinated or consolidated pro- ceedings with Majeski, another Section 10(b) case already on file in Wisconsin. The case was thereafter permanent- | ly transferred pursuant to Section 1404(a) and consolidated | with Majeski for all purposes. The District Court certified only one class, consisting of all BFI investors. However, under the Seventh Circuit’s reasoning, Section 27A’s use of the generic term “‘the jurisdiction’”’ mandated that the timeliness of these similar actions brought pursuant to the same federal statute on behalf of the same class be analyzed under two different statutes of limitations. Thus, under the decision below, the Eckstein plaintiffs received the benefit of the California state statute of limitations al- though their action was pending in the Wisconsin District Court, not California, on June 19, 1991. The Majeski plain- tiffs, on the other hand, received the benefit of the Wiscon- sin state statute of limitations by virtue of their argu- ment that they could have filed in California, even though a |) = their action also was pending in the Wisconsin District Court, not California, on June 19, 1991. If Section 27A were given its common sense meaning, however, only one statute of limitations would be applied to both the Ma- jeski and Eckstein actions. Section 27A directs that the limitations period applicable to both Eckstein and Majeski is the limitations period of “the jurisdiction” in which Eckstein and Majeski were pending on June 19, 1991—not the jurisdiction in which Eckstein was filed two and one half years earlier, or where Mayjeski ‘“‘could have”’ or “would have” been filed. This construction of Section 27A is reinforced by the fact that a proposed draft of Section 27A actually included the language “‘in the jurisdiction in which such civil action was commenced.” 137 Cong. Rec. § 17469-03 (1991) (em- phasis added). That language, however, was deleted in favor of the present version which does not refer to where the ‘faction was commenced.” See I.N.S. v. Cardoza Fon- seca, 480 U.S. 421, 442-43 (1987) (‘Few principles of stat- utory construction are more compelling than the proposi- tion that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language.’’); Tyler v. U.S., 929 F.2d 451, 456 n.8 (9th Cir. 1991) (“the very fact of deletion implies a legis- lative intent different from that in the original proposal’’ (citing 2A Sutherland Construction § 48.18)). In DelCostello, this Court laid to rest any possible ques- tion remaining as to the nature of a borrowed state stat- ute of limitations period in a federal claim, holding that ‘the choice of a limitations period for a federal cause of action is itself a question of federal law,” and cautioning federal courts against allowing the use of state law in a federal question case to interfere with the national policy = of federal uniformity. 462 U.S. at 159 n.13. Congress’ deci- sion not to adopt statutory language referring to “the jurisdiction in which the action was commenced” but to refer only to “the jurisdiction,” comports with this Court’s ruling in DelCostello and confirms that a federal action’s original or hypothetical original geographical origin is ir- relevant to the proper application of Section 27A. Thus, the Court of Appeals’ interpretation of Section 27A con- flicts not only with the plain language of the statute but with this Court’s pronouncement in DelCostello as to federal statute of limitations questions as well. The Court of Appeals’ construction of Section 27A, and its finding that Van Dusen and Ferens apply “whenever different federal courts properly use different rules” (App. 9), are also at odds with the weight of authority address- ing transferred federal question claims. Courts and com- mentators alike have supported the premise that trans- feree courts should apply their own law to transferred federal question claims. See, e.g., Korean Air Lines, 829 F.2d at 1174-76; In re Pittsburgh & L.E.R. Co. Sec. & Antitrust Litig., 543 F.2d 1058, 1065 n.19 (3d Cir. 1976). See also IA J. Moore, Moore’s Federal Practice 4 0.345 [4.-6] (2d ed. 1993); Friendly, “The ‘Law of the Circuit’ And Ali That,” 46 St. John’s L. Rev. 406, 412 (1972). The logical view is that Congress, well aware of that premise and of the potentially conflicting results which could occur if different jurisdictions’ statutes of limitations were to apply to two or more consolidated Section 10(b) cases, de- leted the “in which the action was commenced” language from Section 27A to avoid that very conflict. This interpretation of Congressional action is consistent with an analysis performed by then-Circuit Judge Gins- berg in Korean Air Lines, the seminal case addressing a oe fF —13— the question of which choice of law rule to apply in con- nection with transferred federal question, as opposed to diversity, claims. Circuit Judge Ginsberg reasoned that the policies of Erie R. Co. v. Thompkins, 304 U.S. 64 (1938), which acknowledged a party’s right to the application of the state substantive law where the case was properly filed, “did not figure in the calculus when the law to be applied is federal, not state.” Jd. at 1174. Judge Ginsberg also specifically addressed Van Dusen and determined that its rule was also not applicable in federal question cases. /d. at 1174-76. Accordingly, the court held that the law of the transferee forum would apply to the parties before it since it is logically inconsistent to require one judge to ap- ply simultaneously different and conflicting interpreta- tions of what is supposed to be a unitary federal law. Id. at 1175-76. In Menowitz, the Second Circuit followed DelCostello and Korean Air Lines in deciding to apply the transferee forum’s statute of limitations to a transferred Section 10(b) case in the aftermath of Section 27A, holding that: [although federal courts sometimes arrive at different constructions of federal law, federal law (unlike state law) is supposed to be unitary. Thus, the rule of Van Dusen does not apply by analogy where a case is trans- ferred under § 1407 to a federal court that has a dif. ferent construction of relevant federal law than the federal court in which the action was filed. “ ‘(FJed- eral courts compromise a single system applying a single body of law, and no litigant has a right to have the interpretation of one federal court rather than that of another determine his case.’ ”’ Menowitz, 991 F.2d at 40 (citations omitted). Thus. the Seventh Circuit’s view that Van Dusen’s diversity prin- anitin. ciples apply both to Section 27A transfer cases and when- ever different federal courts apply different norms con- flicts with Menowitz and Korean Air Lines. Additionally, with regard to Majeski, choice of forum is not reliance in the sense meant by Chevron Oil for the obvious reason that it does not represent any detrimental change of position as to the timing of the lawsuit. If the timing of the action has not been affected in reliance on the existing statute of limitations, there has been no “reli- ance” in the ordinary sense of the term. Yet the deci- sion below suggests that retroactivity may be avoided by the argument that, if litigants could have predicted that the law would change, they would have filed somewhere else. If that were a sufficient reason to avoid retroactiv- ity, there would never have been any retroactive applica- tions of a decision under a Chevron Oil analysis because plaintiffs virtually always have a choice of forum and every plaintiff could say “If I had known what the future would bring in this jurisdiction, I would have sued some- where else.” If that were enough to prevent retroactivity, new decisions would have applied retroactively to no one, a conclusion clearly contrary to what this Court recognized in Chevron Oil. In sum, clarification by this Court is needed not only to reach a direct conflict between the Second and Seventh Circuits and to resolve divergent interpretations of the scope of the diversity principles set forth in Van Dusen and Ferens, but to determine the appropriate interplay between Section 27A, Section 1404(a) and the meaning of reliance under Chevron Oil where a plaintiff has a choice of forum in which to file his or her claims. CONCLUSION For the reasons stated, a writ of certiorari should is- sue to review the judgment and opinion of the Seventh Circuit. Respectfully submitted, H. NicHOLAS BERBERIAN STEVEN L. BASHWINER RoBERT J. MANDEL Counsel of Record NEAL GERBER & EISENBERG Mary ELLEN HENNESSY Two North LaSalle Street Amy E. SMITH Suite 2200 KATTEN MUCHIN & ZAVIS Chicago, Illinois 60602 525 West Monroe Street (312) 269-8000 Suite 1600 Chicago, Illinois 60661 DENNIS M. PERLUsS “~ & (312) 902-5200 HUFSTEDLER, KAUS & ETTINGER 355 South Grand Avenue 39th Floor Los Angeles, California 90071 (213) 617-7070 Attorneys for Petitioners APPENDIX App. 1 IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT Nos. 92-1851 & 92-2510 ROBERT ECKSTEIN, et al., Plaintiffs-Appellants, Vv. BALCOR FILM INVESTORS, et al., Defendants-Appellees. Appeals from the United States District Court for the Eastern District of Wisconsin. Nos. 88-C-1079 & 89-C-1315—John W. Reynolds, Judge. ARGUED FEBRUARY 25, 19983—DecIDED AUGUST 20, 1993 Before CUMMINGS, COFFEY, and EASTERBROOK, Circuit Judges. EASTERBROOK, Circuit Judge. By late 1984 New World Entertainment, Ltd. (New World) had experienced some success making and distributing low-budget movies. New World approached Balcor Entertainment Company, Ltd. (BEC), a subsidiary of Shearson Lehman/American Ex- press, Inc., to solicit working capital. New World wanted to expand; BEC wanted some of the profits to be made in movies. There were the makings of a deal: BEC would obtain financing for New World’s films in exchange for part of the films’ profits. Because BEC didn’t want to accept the risk of being the sole source of capital, it re- cruited outside investors. Balcor Film Investors (BFI) is App. 2 a limited partnership formed to raise money for eight to twelve low budget movies that New World would produce and distribute. Early in 1985 BFI registered partnership interests un- der the Securities Act of 1933 and commenced public solic- itation. Subscriptions received were to be held in escrow until $50 million had been secured. Failing to raise this amount by the deadline, BFI reduced the minimum to $35 million, offered to refund the investors’ money, and began soliciting anew. By the end of 1985 $48 million was on deposit, and BFI closed the offering. During the first two years BFI supplied the tax benefits for which the investors had hoped. But New World’s films flopped. In 1988 BFI told its limited partners that they were likely to lose some of their capital. Investors then filed class action suits against Shearson (now known as Shearson Lehman Hut- ton, Inc.), BFI, BEC, the other Balcor entities that had put together the offering, and their officers and directors (collectively Balcor). There are two groups of plaintiffs: a class of investors who read the prospectus (the Majeski plaintiffs) and a class of those who did not (the Eckstein plaintiffs). The Majeski plaintiffs assert a standard fraud theory: they purchased the limited partnership interests in reliance on the misrepresentations in the prospectus and its omissions of material facts. The Eckstein plain- tiffs, whose defining characteristic is failure to read the prospectus, contend that but for the misrepresentations and omissions the offering would not have been successful. This group, in other words, asserts causation in lieu of reliance. Although errors and omissions in the offering documents usually lead to liability under §§ 11 and 12(2) of the 33 Act, 15 U.S.C. §§ 77k, U(2), the plaintiffs feared that their suits would be untimely under §13 of that Act, the statute of limitations applicable to actions under §§ 11 and 12. So they invoked §10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b), and the SEC’s Rule 10b-5, 17 C.F.R. §240.10b-5. This avenue is available even though the investors complain about an initial public offering rather App. 3 than a transaction in the aftermarket. See Herman & MacLean v. Huddleston, 459 U.S. 375 (1983). Section 10(b) and Rule 10b-5 require the investors to show fraud, not just material errors and omissions. In exchange they get a longer statute of limitations—or so they thought. The Majeski plaintiffs filed in October 1988 and the Eckstein plaintiffs in February 1989. When they began the litigation, courts throughout the nation derived from state law the periods of limitations in §10(b) cases. On July 30, 1990, this court overruled opinions that had looked to state law and announced that §13 of the ’33 Act sup- plies the statute of limitations. Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990). On June 20, 1991, the Supreme Court agreed with Short that the federal securities laws are the source of the period of lim- itations, but the Court selected §9(e) of the ’34 Act, 15 U.S.C. §78i(e), as the most appropriate rule. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773, 2782 n.9 (1991). Both §13 of the ’33 Act and §9(e) of the ’34 Act give an investor one year from discovering the facts constituting the violation, but no more than three years from the violation, to begin suit. The advantage of using §10(b) disappeared. Congress responded to Lampf by enacting stopgap legis- lation. A new §27A of the ’34 Act, 15 U.S.C. §78aa-1(a), provides that “(t]he limitation period for any private civil action implied under section [10(b) of the ’34 Act] that was commenced on or before June 19, 1991, shall be the limita- tion period provided by the laws applicable in the jurisdic- tion, including principles of retroactivity, as such laws ex- isted on June 19, 1991.” Plaintiffs believe that this law saves their suits. The district court disagreed, dismissing both as untimely. 786 F. Supp. 1458 (E.D. Wis. 1992). Al- though §27A avoided Lampf, the district court held, it did not disturb Short, which was the law in the seventh circuit on June 19, 1991. And Short, the district court held, is fully retroactive. It concluded that Short governs the Eckstein plaintiffs, who filed in California, as well as the Majeski plaintiffs, who filed in Wisconsin. The Panel on App. 4 Multidistrict Litigation had transferred the Eckstein case to Wisconsin under 28 U.S.C. §1407 for consolidated pre- trial proceedings, and the district court then completed the transfer by invoking 28 U.S.C. §1404(a) to make the transfer permanent. After the transfer the whole case was in Wisconsin, which the district court believed is “the ju- risdiction” to which §27A refers. Both groups of plain- tiffs have appealed. I Whether the Eckstein plaintiffs have appealed correct- ly is another matter. The Majeski plaintiffs may have de- stroyed the Eckstein plaintiffs’ notice of appeal, leaving us without appellate jurisdiction to review the appeal of the Eckstein class. At the heart of the matter is the ques- tion: was the Eckstein case fully consolidated with the Majeski case? If the cases were fully consolidated the Eckstein appellants have problems. Here is what happened. On March 11, 1992, the district court entered judgments dismissing both actions. The Ma- jeski plaintiffs filed a timely motion under Fed. R. Civ. P. 59. Shortly thereafter, the Eckstein plaintiffs filed a notice of appeal. The district court denied the Rule 59 motion, and the Majeski plaintiffs filed a timely notice of appeal. Then the Eckstein plaintiffs filed what they called a “Supplemental Notice of Appeal”’. The clerk of this court treated that document as another notice of appeal and as- signed it a new number. It did not last long: the Eckstein plaintiffs failed to pay the docketing fee, and as a notice of appeal this paper was at all events untimely, coming 34 days after the district court denied the Rule 59 mo- tion—four more than Fed. R. App. P. 4(aX1) permits. Thus our jurisdiction over the Eckstein plaintiffs’ case depends on their notice of appeal filed before the district court acted on the Majeski plaintiffs’ Rule 59 motion. If the district court fully consolidated the cases, the Ecksteins have no valid notice of appeal and we have no appellate jurisdiction. Rule 4(aX4) specifies the “time for LK App. 5 appeal for all parties” when “any party’’ files a timely Rule 59 motion. See Polara v. Trans World Airlines, Inc., 284 F.2d 34 (2d Cir. 1960); Continental Casualty Co. v. United States, 167 F.2d 107 (9th Cir. 1948). If consolida- tion produced a single “‘case,’’ then the Eckstein plain- tiffs’ first notice of appeal had “‘no effect’? because it was filed before disposition of the Majeski plaintiffs’ Rule 59 motion. Fed. R. App. P. 4(aX4). Did the district court consolidate the cases? Yes and no. As often happens, the district court did not clearly explain the extent to which the actions were consolidated. See Ivanov-McPhee v. Washington National Insurance Co., 719 F.2d 927 (7th Cir. 1983). The district court or- dered “the Eckstein and Majeski actions . . . consolidated for the remainder of the pretrial proceedings and trial’”’ and certified each set of plaintiffs as a subclass of a sin- gle class of all investors in BFI. A month later the court added: “the actions are not consolidated for ‘all purposes’ nor are they merged into a single cause of action” (em- phasis in original). What can this mean when the court had certified a single class spanning both sets of plain- tiffs? Because neither case contained the entire class, if the cases were not fully consolidated, there could not have been subclasses. In Jvanov-McPhee, 719 F.2d at 930, we held that cases were fully consolidated because they could have been brought as a single unit and there was no pur- pose in the cases retaining separate identities. Sandwiches, Inc. v. Wendy’s International, Inc., 822 F.2d 707, 710 (7th Cir. 1987), adds that courts should keep in mind the rela- tion between consolidation and appeal. Preserving formal- ly separation may multiply the number of appeals, which should not occur when there is only one nucleus of facts. In order for plaintiffs to make up a single class their claims must have a great deal in common. Fed. R. Civ. P. 23(bX3). We should not have to review twice claims common enough to be classed together. By all lights, the Majeski and Eck- stein cases should have been consolidated for all purposes. Nonetheless, the district court entered two judgments, just as if the suits were separate. Different plaintiffs ap- App. 6 pealed from each judgment. Appellate jurisdiction follows the judgment, providing the certainty that is essential when a misstep may forfeit a valuable right. Separate judgments are independently appealabie, and no one need appeal until the formal judgment under Fed. R. Civ. P. 58 has been entered. United States v. Indrelunas, 411 U.S. 216, 220-22 (1973). Sometimes a party may appeal from a final decision not embodied in a judgment, see Bankers Trust Co. v. Mallis, 435 U.S. 381 (1978), but it is always entitled to wait for (and rely on) the separate Rule 58 judgment. Shalala v. Schaefer, 61 U.S.L.W. 4722, 4725 (U.S. June 24, 1993); Mallis, 435 U.S. at 386; In re Kilgus, 811 F.2d 1112, 1117 (7th Cir. 1987). Anything else baits a trap for unwary litigants—for wary ones, too, the kind who pay particular attention to judgments. The Eck- stein plaintiffs therefore were entitled to rely on the fact that the district judge issued two judgments. They ap- pealed in a timely manner from theirs, and the Majeski plaintiffs’ motion did not affect that appeal. Il BFI used a single prospectus for the two offerings of its partnership interests. When BFI re-offered these in- terests in the fall of 1985 it furnished investors with a supplement describing recent events. The plaintiffs’ claims center on this supplement, which they say left out infor- mation about business reverses New World suffered in 1985. New World was making low-budget films that had limited attendance at the box office and reaped most of their profits from television and from the sale and rental of video cassettes for home viewing. A firm called World- vision had agreed to distribute New World’s films outside the theaters. According to plaintiffs, the supplement to the prospectus fraudulently omitted the fact that Worldvision and New World had had a falling out—that Worldvision, dissatisfied with the quality of the films, was attempting to withdraw as distributor and had filed a suit against New World. Plaintiffs also contend that the offering ma- terials concealed the fact that New World was to keep the lion’s share of the profits from VCR distribution. in eeneeneninaieneeiniinael App. 7 These adverse events occurred before the investors sent in their money between October 11, 1985, and December 31, 1985. But, plaintiffs insist, they were unaware that New World had encountered troubles until BFI told them in mid-1988 that they probably would not get all of their money back. The Majeski plaintiffs filed suit in the Eastern District of Wisconsin in October 1988, while the Eckstein plaintiffs filed suit in the Central District of California in February 1989. Because different issues determine the applicable limitations period for each group of plaintiffs, we discuss them separately. A The Eckstein plaintiffs’ case moved from California to Wisconsin under 28 U.S.C. §1404(a). Section 27A instructs us to use the “laws applicable in the jurisdiction” on June 19, 1991. The district in which the court that, decides the case sits must be “the jurisdiction” for purposes of §27A. But what is the law of that jurisdiction? Short identifies the statute of limitations in force within the seventh cir- cuit on June 19, 1991. Choice-of-law rules are part of any jurisdiction’s whole law, however, a principle important in diversity cases. See Klaxon Co. v. Stentor Electric Man- ufacturing Co., 313 U.S. 487 (1941). Usually we do not think of federal courts as having choice-of-law rules for cases decided under federal law, which is supposed to be uniform. Yet there is one distinctively federal choice-of- law problem. What happens when a federal court transfers the case to another under §1404(a)? Van Dusen v. Bar- rack, 376 U.S. 612 (1964), and Ferens v. John Deere Co., 494 U.S. 516 (1990), hold that such a transfer leaves the law unaffected; the original forum’s rules (including the choice-of-law rules of the state in which that court sits) are unaffected by the movement. Are different circuits like different states for the pur- poses of Van Dusen and Ferens? Usually not. In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C. Cir. 1987) (Ruth B. Ginsburg, J.), affirmed on other grounds under the name Chan v. Korean Air Lines, Ltd., 490 U.S. 122 (1989). A App. & single federal law implies a national interpretation. Al- though courts of appeals cannot achieve this on their own, the norm is that each court of appeals considers the ques- tion independently and reaches its own decision, without regard to the geographic location of the events giving rise to the litigation. This meant to the judges in Korean Air Lines that a transfer under §1404(a) leaves each court to work out the problem for itself rather than to guess how the circuit comprising the original district court would reason. Congress might require one federal court to ap- ply another’s interpretation of federal law, but §1404(a) does not itself do so. Jd. at 1178 (D.H. Ginsburg, J., con- curring). See also Richard L. Marcus, Conflicts Among Circuits and Transfers Within the Federal Judicial Sys- tem, 93 Yale L.J. 677, 702 (1984). We agree with Korean Air Lines that a transferee court normally should use its own best judgment about the mean- ing of federal law when evaluating a federal claim, but §27A instructs us to act differently. Section 27A recog- nizes that different circuits had taken different approaches to the appropriate statute of limitations in suits under §10(b), and it codifies this fractured nature of federal law for cases filed before June 20, 1991. Congress requires us to apply federal law as courts understood it at a point in the past rather than to make an independent judgment about what that law actually is. And the law in use on June 19, 1991, was not nationally uniform. By then three circuits had adopted §13 of the ’33 Act for suits under §10(b). One applied this rule retroactively, another pro- spectively (in the main), and this circuit had not ruled on retroactivity. In all other circuits the courts derived the period of limitations from state law—with different circuits looking to different kinds of state laws. See Pommer v. Medtest Corp., 961 F.2d 620, 627-28 (7th Cir. 1992); Norris vy. Wirtz, 818 F.2d 1329, 1331-33 (7th Cir. 1987). Recently the second circuit concluded that because “fed- eral law (unlike state law) is supposed to be unitary”, a transferee court should apply the law of its circuit and ignore the law of the transferor court when determining App. 9 “the jurisdiction” under §27A. Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993). Menowitz held that Van Dusen and Ferens apply only in diversity cases. We believe that this conclusion disregards both the language of §27A (whose reference to “the jurisdiction” implies a non-uniform fed- eral law) and the holdings of Van Dusen and Ferens, which construed §1404(a) rather than any principle of state law. Although both of those cases arose under the diversity jurisdiction, their references to Erie R.R. v. Tompkins, 304 U.S. 64 (1938), do not imply a ruling limited to state law. Erie is itself part of national law, interpreting the Rules of Decision Act, 28 U.S.C. §1652. Van Dusen and Ferens accordingly apply whenever different federal courts properly use different rules. Erie is not unique in requir- ing federal courts to apply disparate norms. Consider 42 U.S.C. §1988, which leads federal courts to use state law as the basis of a federal period of limitations. Wilson v. Garcia, 471 U.S. 261 (1985); Owens v. Okure, 488 U.S. 235 (1989). Or consider the law of federal! contracts, which is largely borrowed from state law. United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979); United States v. Einum, 992 F.2d 761 (7th Cir. 1993). When the law of the United States is geographically non-uniform, a transferee court should use the rule of the transferor forum in order to im- plement the central conclusion of Van Dusen and Ferens: that a transfer under §1404(a) accomplishes “but a change of courtrooms’. Van Dusen, 376 U.S. at 639. Section 27A presents such a situation. Accordingly we respectfully dis- agree with Menowitz.t So we must examine how a judge in the Central District of California would have viewed the limitations question on June 19, 1991. At the time, courts within the ninth circuit used the most analogous statute of limitations un- der the law of the state in which the district court sat. + Because this opinion creates a conflict among the circuits, it was circulated before release to all judges in active service. Cir- cuit Rule 40(f). None favored a hearing in banc. App. 10 Stitt v. Williams, 919 F.2d 516, 522 (9th Cir. 1990). Cali- fornia’s three year statute of limitations for fraud, Cal. Civ. Proc. Code §338, was the appropriate one to use in securities fraud cases. [bid. The period under that statute “eommences when the plaintiff discovered or could have discovered the fraud with the exercise of reasonable dili- gence”. SEC v. Seaboard Corp., 677 F.2d 1301, 1309 (9th Cir. 1982). See also Miller v. Bechtel Corp., 33 Cal. 3d 868, 875, 663 P.2d 177, 181 (1983); Mosesian v. Peat, Mar- wick, Mitchell & Co., 727 F.2d 873, 877 (9th Cir. 1984). The district court concluded that the Eckstein plaintiffs’ claim would be barred by that rule as well as the federal rule adopted in Short. It concluded that the time for bring- ing suit started to run when the investors purchased their limited partnership interests because the dire warnings of risk in the prospectus should have put the investor: on notice of fraud. 786 F. Supp. at 1466. This logic is flawed. A warning about risk does not give notice of fraud. Every prospectus is filled with advice about the perils of the business, because every business faces its own set of risks. Giving general advice about the industry does not relieve an issuer of the need to be truthful about itself. Warn- ings of the kind that appeared in BFI’s prospectus put investors on notice that there is a chance things may not go as hoped in the future; they do not put investors on notice that statements made in the prospectus are untrue at the time, or that important facts have been left out of the prospectus. Plaintiffs allege, for example, that New World and Worldvision had come to blows, and that this gravely affected the opportunity for profitable investment. A prospectus stating a risk that such a thing could happen is a far cry from one stating that this had happened. The former does not put an investor on notice of the latter. Plaintiffs’ argument that they “could [not] have discov- ered the fraud with the exercise of reasonable diligence” until Balcor told them in 1988 they probably would lose money is equally flawed. Discovering that one has lost money is not the same as discovering that one has been defrauded. Most losses occur without fraud of any kind. App. 11 DiLeo v. Ernst & Young, 901 F.2d 624, 627-28 (7th Cir. 1990). And victims of fraud usually discover the problem long before the wrongdoer stands up and confesses. Plain- tiffs’ position amounts to an assertion that the time to sue does not start until the extent of the injury becomes clear. But the question under California law is when the investors discovered (or should have discovered) the de- ceit, not when the full consequences of that deceit are felt. An investor can be defrauded before any loss is real- ized. Discovery of the fraud means the discovery of the misrepresentation. Howard v. Haddad, 962 F.2d 328, 330 (4th Cir. 1992); Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1412-13 (9th Cir. 1987). Investors must bring their claims as soon as they become aware of misrepresenta- tions or omissions, instead of waiting ‘‘while avoidable damages accrue.” Volk, 816 F.2d at 1412. It is conceivable, we suppose, that until receiving the advice in mid-1988 reasonable investors would not have bestirred themselves to find out about New World. (The Eckstein plaintiffs, after all, invested in BFI without read- ing the prospectus; apparently they do not think infor- mation very useful.) Many reasonable investors—the kind who read the prospectus?—would have pricked up their ears sooner. The fact that Worldvision filed suit against New World in the fall of 1985 tu rescind its contract may have been sufficient to trigger an investigation. The suit itself was a piece of information missing from the pro- spectus; from one angle its omission was the fraud, yet the fact of the suit was public knowledge in 1985. If that should have triggered an investigation, then California’s statute of limitations expired before the Eckstein plain- tiffs filed their suit in February 1989. That plaintiffs may have been ignorant of Worldvision’s suit should not mat- ter, because they, not the defendants, bear the burden of their own ignorance. See United States v. Kubrick, 444 U.S. 111, 124 (1979); Norris, 818 F.2d at 1335-36. It may be possible to decide what reasonable investors knew, or should have known, without submitting the question to a jury, but the subject is one for the district court to ad- dress in the first instance. App. 12 B Unlike the Eckstein plaintiffs, the Majeski plaintiffs have clearly satisfied the relevant state statute of limitations. Wisconsin gives investors three years from the sale, Wis. Stat. §551.59, and the Majeski plaintiffs filed before the end of 1988, at a time when we would have used that law as the period of limitations. Cahill v. Ernst & Ernst, 625 F.2d 151 (7th Cir. 1980). But §13 of the ’33 Act gives investors only one year from the time the fraud was or should have been discovered, and the considerations we discussed immediately above imply that the Majeski plain- tiffs would have a hard time satisfying that requirement. The district court held that §13 applies to the Majeski plaintiffs because they filed suit within the seventh cir- cuit after Short had been decided, and that the suit is untimely under §13. The district court concluded that Short is fully retroac- tive. Under current law, it would be. James B. Beam Dis- tilling Co. v. Georgia, 111 S. Ct. 2439 (1991), holds that decisions are retroactive if the court applies the new rule to the parties. See also Harper v. Virginia Department of Taxation, 61 U.S.L.W. 4664 (U.S. June 18, 1993). Short applied its new rule to the litigants in that case. But §27A tells us to use the law, including principles of retroactivity, in force on June 19, 1991, and Beam, like Lampf, was de- cided on June 20, 1991. We concluded in McCool v. Strata Oil Co., 972 F.2d 1452, 1458-59 (7th Cir. 1992), that Beam changed the law of retroactivity, which means that on June 19, 1991, Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), still controlled the approach to that subject. McCool holds that §27A requires us to employ Cnevron’s approach. To apply Chevron courts must balance several factors. After a consideration of these factors McCool concluded that Short does not apply retroactively when the plain- tiff relied on the pre-Short limitations period. 972 F.2d at 1459. The dispositive question under McCool thus is: if the plaintiffs had known that Short would apply to their claim, App. 13 could and would they have filed within the period of lim- itations? The Majeski plaintiffs say that they filed suit within two months of discovering the fraud, so it is hard to see how any delay can be chalked up to reliance on the availability of Wisconsin’s law. But the belief that state law would provide three years may have influenced the investors in other ways. Perhaps it offered assurance that they need not investigate expeditiously. Perhaps the Majeski plaintiffs relied by filing in Wisconsin when they could have chosen California. Although Balcor insists that filing in one forum as opposed to another is not a legiti- mate form of reliance, we disagree. McCool held that the plaintiffs had relied on the former status of the law by dismissing a suit they had filed in state court. 972 F.2d at 1459. We do not believe that relying by foregoing the opportunity to pursue a claim in a state forum should dif- fer from foregoing the opportunity to pursue a claim in another federai forum. Ultimately, the determination whether the plaintiffs did rely is for the district court. Chevron creates a balanc- ing approach, and the court of first instance does the bal- ancing with deferential appellate review. Indeed if mate- rial factual questions about reliance are controverted the matter cannot be decided on summary judgment at all. Berning v. A.G. Edwards & Sons, Inc., 990 F.2d 272, 276-77 (7th Cir. 1993). Ill Despite our disagreement with the district court’s rea- son for dismissing the suits, a remand does not necessarily follow. We may affirm its judgment on any properly pre- served ground that the record supports. Massachusetts Mutual Life Insurance Co. v. Ludwig, 426 U.S. 479 (1976). A timely but non-meritorious suit should be cut off at the first opportunity. We therefore inquire whether the plain- tiffs have a good claim under the securities laws. App. 14 A Because they never read the prospectus, the Eckstein plaintiffs encounter difficulty in establishing that they re- lied to their detriment on the seller’s statements, a com- ponent of a claim under §10(b) and Rule 10b-5 according to the canonical formulation. See Lisi v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965). Although courts often refer to “‘reliance”’ as an element of the claim under §10(b), we have held that reliance is a means by which the plain- tiff may establish that material misstatements or omissions caused him injury, rather than an indispensable element. Flamm v. Eberstadt, 814 F.2d 1169, 1173 (7th Cir. 1987). See also Rowe v. Maremont Corp., 850 F.2d 1226, 1233 (7th Cir. 1988). The Supreme Court’s adoption of the fraud- on-the-market doctrine in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), shows that reliance is not essential; although Basic continued to use that word, it allowed an alternative method of establishing causation—an effect on the market price—to support recovery by investors who never read the supposedly deceitful statement. Jd. at 243-47. See also Affiliated Ute Citizens v. United States, 406 U.S. 128, 152-54 (1972). When “‘the market’’—that is, the outcome of trading by persons who are well-informed about what the issuer is doing and saying—translates a lie or omission from voice to price, it is easy to see how injury can befall a person who is unaware of the deceit. The price in an open and developed market usually reflects all available information, because the price is an outcome of competition among knowl- edgeable investors. See generally Sanford J. Grossman, The Informational Role of Prices (1989); James H. Lorie, Peter Dodd & Mary Hamilton Kimpton, The Stock Market: Theories and Evidence (2d ed. 1985). Competition among savvy investors leads to a price that impounds all avail- able information, even knowledge that is difficult to ar- ticulate. We call a market “efficient’”” because the price reflects a consensus about the value of the security be- ing traded—not necessarily because the price captures the true value of the firm’s assets but because the price is App. 15 the best available device to assess the significance of ad- ditional bits of information. Investors who trade at the market price are affected, for good or ill, by the infor- mation underlying that price. Not all stocks are eagerly followed by astute investors with the capital to turn their views into movements in price. The more thinly traded the stock, the less well the price reflects the latest pieces of information. “Efficiency” is not an all-or-nothing phenomenon. See Comment, Suf- ficient Efficiency: Fraud on the Market in the Initial Pub- lic Offering Context, 58 U. Chi. L. Rev. 1393 (1991). Prices of even poorly followed stocks change in response to news, including statements by the issuers, and these changes may be better indicators of causation than litigants’ self- serving statements about what they read and relied on and about what they would have paid (or whether they would have bought at all) had the issuer said something different. Even an “inefficient”? market price is objective and contemporaneous with events, not plagued by lapses of memory or the cognitive dissonance that influences what witnesses may remember years later. Still, at some point the market process peters out and the litigation process offers superior information about causation. The Eckstein plaintiffs may have reached that point. BFI issued its interests as part of an initial public of- fering at a fixed price, $1,000 per unit (with a minimum of three units per investor). No trading market valued these interests; only the investors could do so. No trading market developed afterward, so we cannot combine the Capital Asset Pricing Model with the tables in the Wall Street Journal to see what effect Worldvision’s suit, or the other information that slowly came to light about New World, had on price. It would be revealing if news about Worldvision’s withdrawal as New World’s distributor caused the price to fall by 20% (using the CAPM to hold the market constant). It would be equally revealing if the news had no effect on price, which would imply either that other distributors were readily available (so that information about Worldvision was not material) or that investors had App. 16 fully taken this fact into account back in 1985 (so the stat- ute of limitations would bar these suits). Alas, no such luck, because there are no such prices. This does not mean that the Eckstein plaintiffs cannot show causation, but they must carry the greater burden of proving the causal links that an efficient secondary market establishes auto- matically. The Eckstein plaintiffs try to do so via a theory we could call “fraud-created-the-market.” BFI’s offering was conditioned on its ability to raise at least $35 million. A minimum sales requirement may serve two functions: it ensures that the venture has sufficient capital to function, and it provides a form of vicarious protection to ignorant investors who assume that the condition will be met only if a significant number of informed buyers think the proj- ect a good investment. Plaintiffs allege that, if BFI had made complete and truthful statements, it would not have been able to selFinterests to investors who did read the prospectus. Without those investors, BFI would not have been able to sell the minimum amount, and thus would have returned the plaintiffs’ tendered funds. Thus, say the Eckstein plaintiffs, the misstatements and omissions in the prospectus caused their losses. The fifth circuit adopted a variant of this approach by a vote of 12 to 10 in Shores v. Sklar, 647 F.2d 462 (1981) (in bane). Shores held that an investor may maintain an action under §10(b) by establishing that the fraud permitted the securities to exist in the market—that but for the fraud the securities would have been “unmarketable”—and that the investor relied on their existence. The tenth and elev- enth circuits follow modified versions of the Shores ap- proach, while the sixth circuit has repudiated that case outright. Compare T.J. Raney & Sons, Inc. v. Ft. Cobb Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 (10th Cir. 1983), and Ross v. Bank South, N.A., 885 F.2d 723 (11th Cir. 1989) (in bane), with Freeman v. Laventhol & Horwath, 915 F.2d 193 (6th Cir. 1990). We agree with the sixth circuit. The existence of a security does not depend App. 17 on, or warrant, the adequacy of disclosure. Many a secu- rity is on the market even though the issuer or some third party made incomplete disclosures. Federal securities law does not include “merit regulation.” See The Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990); §23 of the ’33 Act, 15 U.S.C. §77w. Full disclosure of adverse information may lower the price, but it does not exclude the security from the market. Securities of bankrupt cor- porations trade freely; some markets specialize in penny stocks. Thus the linchpin of Shores—that disclosing bad information keeps securities off the market, entitling in- vestors to rely on the presence of the securities just as they would rely on statements in a prospectus—is simply false. Without the aid of Shores, the Eckstein plaintiffs have rough sledding ahead. They cannot use the incomplete or rosy nature of Balcor’s pamphlets, which they may have read, as the actionable “fraud”; sales literature need not repeat the full disclosures and risk analysis in the pro- spectus. (We discuss this more fully below.) To prevail the Eckstein plaintiffs must prove that, had the prospec- tus been free from fraud, BFI would not have satisfied the minimum-sale requirement of $35 million. Because this is a suit under §10(b) of the ’34 Act rather than §§ 11 or 12(2) of the ’33 Act, the Eckstein plaintiffs must es- tablish this counterfactual proposition about the decision- making of thousands of investors using only statements or omissions amounting to fraud; other errors and omis- sions that might have supported liability under §§ 11 or 12(2) do not support an inference of causation that can replace direct reliance in a case under §10(b). The differ- ence between errors and fraud, and the fact that BFI at- tracted $48 million, substantially exceeding the $35 million cutoff, present the Eckstein plaintiffs with a daunting task. Still, the record in its current state does not doom their case, so we must remand their case to the district court for further proceedings. App. 18 B The Majeski plaintiffs, who read the prospectus, may establish causation in the traditional way, by proof of their reliance on any misstatements and omissions. These plain- tiffs advance a second theory—that because Balcor circu- lated upbeat brochures and other supplemental literature that was much easier to understand than the dense pro- spectus, the defendants should have put the stern warn- ings about risk in these documents as well. Why, one of these brochures even offered tables of possible rates of return under different assumptions, and the worst case still showed BFI able to repay the original investments (although without interest or other profits). Because these easy-to-digest brochures dominated the investors’ percep- tion of the risks, plaintiffs insist, Balcor was obligated to make additional disclosures of risk in the supplemental literature. To simplify the conduct of this litigation on re- mand, we now hold that such a theory cannot support a claim under §10(b)—which, recall, depends on proof of fraud, and not just errors or omissions. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976); Aaron v. SEC, 446 U.S. 680 (1980). The ’33 Act permits issuers, underwriters, and dealers to engage in “free writing’”’ once the registration state- ment becomes effective, and to furnish promotional litera- ture to investors provided that literature is accompanied or preceded by a prospectus. Section 2(10Xa) of the ’33 Act, 15 U.S.C. §77b(10Xa); Louis Loss, Fundamentals of Securities Regulation 119 (1983). Only the registration statement need be self-contained. A prospectus is a subset of the information contained in the registration statement, and the sales brochures are a subset of the information in the prospectus (plus the customary effort to sell the securities). If the sales literature had to contain all the warnings that appear in the prospectus, the privilege of distributing supplemental sales literature would be all but meaningless. Federal law establishes a regime in which the prospectus contains the comprehensive description of App. 19 the securities. Other literature can be brief precisely be- cause an inquiring investor has the prospectus to turn to. Federal law also establishes a rule for resolving conflicts: in the event statements in sales brochures and the pro- spectus do not agree, the prospectus wins. See Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1033 (2d Cir. 1993). “If the investor already possesses information suf- ficient to call [a] representation into question, he cannot claim later that he relied on or was deceived by the lie.” Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985). See also, e.g., Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030-31 (9th Cir. 1992); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518-19 (10th Cir. 1983). The Majeski plaintiffs do not contend that the risk disclosures in the prospectus were buried or indigesti- ble; to the contrary, they were prominent and blunt. Cf. Virginia Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749, 2760-61 (1991); Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., No. 92-2684 (7th Cir. Aug. 19, 1993); Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317, 1322, 1325 (7th Cir. 1988). Failure to disclose impor- tant things in supplemental literature is not fraud when those things appear in the prospectus. One final observation. Many of the claims in this case arise out of predictions that did not come to pass. For example, the Majeski plaintiffs allege that Balcor stated that presales of movies would generate revenues equal to half of the movies’ production costs, and that this state- ment is false. Yet the statement is nothing but a predic- tion about how much revenue New World expected to generate from preselling movies. Only statements or omis- sions of fact can be fraudulent. Although intentions and beliefs are ‘facts’ for this purpose when they are open to objective verification, Sandberg, 111 S. Ct. at 2760, 2765, an inability to foresee the future does not constitute fraud, because “(t]he securities laws approach matters from an ex ante perspective”. Pommer, 961 F.2d at 623. See DiLeo, 901 F.2d at 627-28. If those statements had a reasonable basis when made, the defendants did not com- Se aia ia tai i App. 20 mit fraud. Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513 (7th Cir. 1989). The judgments are vacated, and the cases are remanded for further proceedings consistent with this opinion. As the district court dismissed the plaintiffs’ claims under state law only because it had dismissed all of their claims under federal law, the state-law claims must be reinstated. A true Copy: Teste: Clerk of the United States Court of Appeals for the Seventh Circuit a App. 21 UNITED STATES COURT OF APPEALS For the Seventh Circuit Chicago, Illinois 60604 D NT - WITH : NT Date: August 20, 1993 BEFORE: Honorable Walter J. Cummings, Circuit Judge Honorable John L. Coffey, Circuit Judge Honorable Frank H. Easterbrook, Circuit Judge Nos. 92-1851 and 92-2510 ROBERT ECKSTEIN, et al., Plaintiffs - Appellants . BALCOR FILM INVESTORS, BALCOR ENTERTAINMENT COMPANY, BALCOR COMPANY, et. al., Defendants - Appellees Appeal from the United States District Court for the Eastern District of Wisconsin No. 88 C 1079, John W. Reynolds, Senior Judge This cause was heard on the record from the above mentioned District Court, and was argued by counsel. On consideration whereof, IT IS ORDERED AND ADJUDGED by this court that the judgment of the Dis- trict Court is VACATED and the case is REMANDED, in accordance with the decision of this court entered this date. Appellants shall recover their costs. App. 22 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN RALPH MAJESKI, JOSEPH YACH, JANICE WAISMAN, LARRY R. PETERSON, THOMAS WEIL, LEE ALDRIDGE, RANDY KARPINSKY , KENNETH KULAS ROBB S. ELLIOTT and RAYMOND HARDING, Plaintiffs, Vv. Civil Action No. 88-C-1079 BALCOR ENTERTAINMENT COMPANY LTD, an Illinois corporation; SHEARSON LEHMAN HUTTON, INC., f/k/a SHEARSON LEHMAN BROTHERS, INC., and f/k/a SHEARSON LEHMAN/AMERICAN EXPRESS, INC., a Delaware corporation; THE BALCOR COMPANY, an Illinois corporation; BALCOR/AMERICAN EXPRESS INC., an Illinois corporation; BALCOR SECURITIES COMPANY, an Illinois corporation, THE AMERICAN EXPRESS COMPANY, a New York corporation; NEW WORLD PICTURES, LTD.., a California corporation, and BALCOR FILM INVESTORS, an Illinois Limited Partnership, Defendants. ROBERT ECKSTEIN and SYLVIA ECKSTEIN, on behalf of themselves and all others similarly situated, Plaintiffs, Vv. Civil Action No. 89-C-1315 App. 23 BALCOR FILM INVESTORS, BALCOR ENTERTAINMENT COMPANY, THE BALCOR COMPANY, THE BALCOR SECURITIES COMPANY, JERRY M. REINSDORF, ROBERT A. JUDELSON, JAMES E. FINLEY, GREGORY S. JUNKIN, BARRY R. JACKSON, JOSEPH A. KRUSZYNSKI, NEW WORLD ENTERTAINMENT, LTD., LAWRENCE L. KUPPIN, ROBERT REHME, and HARRY E. SLOAN, Defendants. DECISION AND ORDER INTRODUCTION This action concerns a public offering of limited partnership interests in Balcor Film Investors (“BFI”). BFI was formed to produce and distribute movies pursuant to an agreement with a motion picture com- pany, New World Entertainment, Ltd. (“New World”). The initial offering was unsuccessful, and the Securi- ties Exchange Commission required that the purchases of BFI interests be cancelled. On October 11, 1985, the prospectus was amended to make a second offering and to seek resubscription by previous investors. The interests were sold between October 11, 1985, and December 31, 1985. Both the Majeski and Eckstein classes’ allege that the defendants violated § 10(b) of ' On August 23, 1989, the Judicial Panel on Multidistrict Litiga- tion ordered, pursuant to Title 28 U.S.C. § 1407, that the case Robert Eckstein, et al. v. Balcor Film Investors, et al. ( Senate ) ) (continued... App. 24 the Securities Exchange Act of 1934 and Rule 10b-5 by portraying the BFI investment as “safe and conserva- tive.” This court concludes, as discussed below, that the defendants adequately conveyed the risky nature of the BFI investment. Presently before the court is the defendants’ No- vember 5, 1991 motion for partial summary judgment on all remaining federal claims in both Majeski and Eckstein. This court previously dismissed the Majeski class claims that the defendants violated §§ 17(a) and 12(2) of the Securities Act of 1933. The only additional federal claim alleged by the Majeski class is that the defendants violated § 10(b) and Rule 10b-5. The Eck- stein class only alleges violations of § 10(b) and Rule 10b-5 in its complaint. The defendants argue that the federal securities law claims under § 10(b) and Rule 10b-5 alleged in both Majeski and Eckstein are barred by the statute of limitations in light of a recent Supreme Court decision, Lampf, Pleva, Lipkind, Prupis igrow v. Gi » 111 S. Ct. 2773 (1991) (“Lampf”). In “Lampf’, the Supreme Court established a uniform statute of limitations for Section 10(b) claims that “[llitigation instituted pursuant to § 10(b) and Rule 10b-5 . . . must be commenced within one year after the discovery of the facts constituting the viola- ' (...continued) be transferred from the Central District of California to this court for consolidated pretrial proceedings with Ralph Maijeski., et al. v. Balcor Film Investors, et al. (“Majeski”). On February 27, 1991, this court permanently transferred, pursuant to Title 28 U.S.C. § 1404(a), Eckstein to this court. This court also consolidated Majeski and Eckstein for pretrial and trial purposes. App. 25 tion and within three years after such violation.” Lampf at 2782 (footnote omitted). The Supreme Court applied this rule retroactively. On December 20, 1991, the President signed Senate Bill 543 into law, which essentially overruled Lampf. The new law states that: The limitation period for any private civil ac- tion implied under section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws ap- plicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991. Federal Deposit Insurance Corporation Improvement Act of 1991, Public L. No. 102-242, § 476, 105 Statutes 2236, 2387 (1991). The defendants argue that the Majeski and Eckstein classes knew or should have known of their claim in 1985 when they received the BFI prospectus, which contained high risk disclosures; these high risk disclosures would have been in conflict with the “safe and conservative” investment portrayal which the plaintiffs allege the defendants made. Because the last possible day of sale for BFI investments and of receipt of the prospectus was December 31, 1985, any claim accruing at this time had to be filed by December 31, 1988, to meet the three-year prong of the statute of limitations, as this court discusses below. Alternative- ly, the defendants argue that the plaintiffs knew or should have known of their claim no later than May 14, 1987, when the plaintiffs received a report that BFI had produced all its films, and had a net loss of App. 26 $14 million. Any claim accruing at this time had to be filed by May 14, 1988, to meet the one-year prong of the statute of limitations, as this court discusses below. ANALYSIS Rule 56(c) of the Federal Rules of Civil Procedure provides that a federal district court shall grant a motion for summary judgment if the pleadings, deposi- tions, answers to interrogatories, admissions, and affidavits indicate that no material facts are in dispute and that the moving party is entitled to judgment as a matter of law. Howland v. Kilquist, 833 F.2d 639, 642 (7th Cir. 1987). The party moving the court for summary judgment has the burden of proving that no material facts are in dispute, and the court must re- view the record with all reasonable inferences being drawn in favor of the non-moving party. Becker v. Tenenbaum-Hill Associates, Inc., 914 F.2d 107, 110 (7th Cir. 1990); Reardon v. Wroan, 811 F.2d 1025, 1027 (7th Cir. 1987). Applicable Law The Eckstein class argues that since its complaint was originally filed on February 10, 1989, in the Ninth Circuit, the Ninth Circuit’s statute of limitations should be applied. California Code of Civil Procedure § 388(4), which the Ninth Circuit has borrowed for 10(b) purposes, allows actions filed within three years of discovery of the facts constituting fraud. The defendants argue that the new law mandates that “the jurisdiction” is the Seventh Circuit. This App. 27 court agrees with the defendants; the Seventh Circuit was “the jurisdiction” for this action as of June 19, 1991. Additionally, this court’s earlier analysis and conclusion that Seventh Circuit law applies to the Eckstein class is still applicable. See Eckstein _v. Balcor Film Investors, 740 F. Supp. 572 (E.D. Wis. 1990). Thus, the Seventh Circuit law as it existed on June 19, 1991 applies. The relevant Seventh Circuit case is Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990), cert. den., 111 S. Ct. 2887 (1991) (“Short”). In Short, the Seventh Circuit decided to change its practice of consulting state blue sky statutes to determine the statute of limitations for actions brought under § 10(b) and Rule 10b-5. The court held that § 13 of the Securi- ties Act of 1933 is the controlling statute of limitations for actions under § 10(b) and Rule 10b-5. Id. at 1389. That statute provides: No action shall be maintained to enforce any liability .. . unless brought within one year after the discovery of the untrue statement or the omis- sion, or after such discovery should have been made by the exercise of reasonable diligence.... In no event shall any such action be brought to enforce a liability created . . . more than three years after the sale. Short at 1390. In Short, the Seventh Circuit applied this statute of limitations to the plaintiff in that case. The Seventh Circuit specifically declined to determine whether its decision should be applied retroactively to other actions. App. 28 All the parties in this action discuss Chevron Oil v. Huson, 404 U.S. 97 (1971), in which the Supreme Court established three factors to consider when determining whether newly-created court law should be applied retroactively: (1) whether the decision “es- tablish[es] a new principle of law, either by overruling clear past precedent on which litigants may have relied ... or by deciding an issue of first impression whose resolution was not clearly foreshadowed” (cita- tions omitted); (2) “whether [the] retrospective opera- tion will further or retard its [the new rule’s] opera- tion” (citation omitted); and (3) whether the retroac- tive application “could produce substantial inequitable results” (citation omitted). Id. at 106-107. While the Seventh Circuit has not yet addressed the issue of whether the Short decision should be applied retroactively, this court has applied Short ret- roactively when no reliance on the formerly applicable statute of limitations has been shown. See Wentzka v. Gellman, 759 F. Supp. 484, 487 (E.D. Wis. 1991). In a recent decision, the Supreme Court greatly reduced, if not abolished, the impact of Chevron Oil when it held that “it is error to refuse to apply a rule of federal law retroactively after the case announcing the rule has already done so.” See James B. Beam Distilling Co. v. Georgia, 111 S. Ct. 2439, 2446 (June 20, 1991) (“Beam”). This decision was made one day after the June 19, 1991 date established by the new law. Beam clarifies, but does not create new law. Thus, the then existing law in the Seventh Circuit must be applied, which means that Beam directs this court to apply the rule adopted by the Seventh Circuit in Short to this action. App. 29 This court notes that the policy reasons for a uni- form statute of limitations are great. See, e.g., Short at 1388-1389. Those policy considerations are even stronger in a case such as this, where a class action involves a number of people from different states. Maieski It is clear that the Majeski complaint, filed on October 11, 1988, was timely filed with respect to the three-year prong of the applicable statute of limita- tions. The defendants argue that the Majeski class filed its complaint more that one year after it knew or should have known of the facts supporting its alleged claim, which brings us to the question of whether the prospectus and its accompanying reports did or should have put the plaintiffs of notice of their claims. In support of their proposition, the defendants argue that the investors were repeatedly warned of the risky nature of the BFI investment, beginning with the prospectus and then repeated in the annual reports.” The prospectus itself contained badges of riskiness. The following quotes list some of these badges, with this court’s emphasis. THIS OFFERINC INVOLVES CERTAIN RISK FACTORS. In this regard, investors should consid- er that: 2 The court has attached a chart to this opinion to aid the reader in following the progression of events relevant to this action. en App. 30 (1) Interests are being offered only to per- sons who meet the suitability standards set forth in this Prospectus. See “Who Should Invest.” ... (4) The success of a motion picture is large- ly dependent upon public taste, which cannot be accurately anticipated, and other factors beyond the control of the General Partner. Accordingly, it is impossible for anyone to predict with a high degree of certainty whether any particular picture or group of pictures will be financially successful. See “Risk Factors--The Motion Picture Industry Generally.” For further discussion of risks of the offering, see “Risk Factors.” Jan. 8, 1985 BFI Prospectus at 1 (emphasis added).* An investment in the Partnership involves a high ree of risk... . Accordingly, Interests will be sold only to a person who represents in writin nt n ] j nci n Id. at 2 (Who Should Invest) (emphasis added). The production, distribution and exploitation of motion pictures is a complex and risky undertak- ing and there can be no assurance that the Part- nership’s investment objectives will be realized in whole or in part. ° A copy of the prospectus can be found attached as Ex. H to the defendants’ motion. aie App. 31 Id. at 4 (Partnership Investment Objectives) (emphasis added). The following briefly summarizes certain signi- ficant risks relating to an investment in the Part- nership. These risks are more completely dis- cussed in the “Risk Factors” section of this Pro- spectus and in the other sections of this Prospec- tus referred to therein. The following summary is qualified in its entirety by reference to such “Risk Factors” section and to the other sections of this Prospectus cited therein. --An investment in the Partnership is sub- ject to all of the risks associated with the mo- tion picture industry. The success of any mo- tion picture is largely dependent upon public taste, which cannot be accurately anticipated. In addition, the success of a motion picture is dependent upon several factors, including local promotion, the cooperation and acceptance of exhibitors and the popularity of other motion pictures being distributed at the time a picture is released. The motion picture industry is highly competitive and Partnership Pictures will be competing with pictures from many sources, including pictures produced and dis- tributed by companies which are better capital- ized and better established in the motion pic- ture industry than are the Partnership and New World. --The Partnership’s arrangements with New World reserve for New World a substantial amount of discretion with respect to several significant factors relating to the development, aiiaiaseiieiianiaaaaitaiadieiiaeaele App. 32 acquisition, production and distribution of Partnership pictures. The Partnership will be largely dependent upon the performance by New World of its obligations under the Produc- tion Agreement, including New World’s ability to identify motion picture projects with poten- tial for commercial appeal, to product commer- cially viable pictures on budget and on sched- ule and to exploit such pictures successfully. --The Partnership will also be dependent upon the overall financial performance of all aspects of New World’s operations for the value of the Preferred Stock and to generate suffi- cient earnings (in excess of present earnings) to make interest and principal payments when due under the Note. Between accountings to the Partnership (monthly, for an initial period, and quarterly thereafter), amounts otherwise le to the Partnershi ing] with other funds belonging to New World or other parties. In the event of the insolvency of New World, the Partnership may be unable to receive payments from New World as and when they are due. In addition, the Partner- ship has agreed with New World and its prin- cipal lender to forego certain legal remedies which would otherwise be available to it under certain conditions. --The Partnership intends to incur indebt- edness in connection with the financing of Distribution Expenses. The cost of this borrow- ing may reduce profits or increase losses re- sulting from the operations of the Partnership. App. 33 --The General Partner will have sole re- sponsibility for, and control of, all aspects of the Partnership’s operations, and the Limited Partners will be entirely dependent upon the General Partner for the management of the Partnership’s business. The Partnership is newl rm h rating histor . ; ONG ee ene ava ha 2 hi --The General Partners and New World will be subject to various conflicts of interest in connection with the transactions provided for in the Production Agreement. Id. at 6 (Risk Factors) (emphasis added). An investment in the Partnership involves a high degree of risk and should only be con- sidered by persons who can afford to lose their entire investment in the Partnership. In addi- tion to the factors set forth elsewhere in the Prospectus (see “Description of Motion Picture Industry and New World Pictures” and “Busi- ness of the Partnership”), investors should carefully consider the following: 1. The Motion Picture Industry in General. The Partnership’s activities are subject to all of the risks associated with the motion picture industry. Only a relatively small percentage of : ' . mt a . their investment in pictures. In view of the foregoing, it is impossible for anyone to predict whether any particular pic- App. 34 ture or group of pictures will be financially successful and there can be no assurance that the Partnership will recover its costs in con- nection with the production, acquisition and distribution of the Partnership Pictures. 2. Developments in the Motion Picture In- dustry. It is not possible to predict accurately the other effects that recent technological de- velopments, and the developments that may occur in the future, may have on the value of rights in certain markets or media, the motion picture industry in general or on the ability of Partnership Pictures to generate revenues. 10. No Operating History. The Partnership is —_ formed and has no-operating history ment in me Partnership. The Partnership will be competing with companies which are better capitalized and better established in the mo- tion picture industry. Id. at 27-30 (Risk Factors) (emphasis added). The defendants further argue that the annual reports did or should have put the Majeski class on notice that the BFI investment was not a conservative investment as the plaintiffs allege they were told: Based on New World’s estimates of ultimate revenues from the 11 partnership pictures re- leased through June 30, 1986, and the addi- tional production and distribution costs the partnership has committed to pay relating to App. 35 these pictures, the general partner does not ri its investment in these pictures. Aug. 13, 1986 BFI Second Quarter 1986 Report to Investors and Interim Financial Statements at 1 (Operations) (emphasis added).‘ Based on estimates provided by New World regarding the ultimate revenues expected to be generated from all markets for the eleven films released through June 30, 1986, and the addi- tional production and distribution costs to be paid, the Partnership does not believe it will recover its total investment in these films. Id. at 8 (Management’s Discussion and Analysis, Operations) (emphasis added). Based on estimates provided by New World re- garding the ultimate revenues expected to be generated from all markets for the films re- leased through September 30, 1986 [eighteen total], and the additional production and dis- tribution costs to be paid, the Partnership does not believe it will recover its total investment in these films. * A copy of this report can be found attached as Ex. A to the defendants’ motion. This court refers to the reports by the typewritten dates on the reports. Apparently, there was often a several month delay between the date and the mailing of the reports to the investors. App. 36 Nov. 13, 1986 BFI Third Quarter 1986 Interim Finan- cial Statements at 8 (Management’s Discussion and Analysis, Operations) (emphasis added).° Based on estimates regarding the ultimate rev- enues expected to be generated from all mar- kets for the films released through December 31, 1986 [nineteen total], and the additional production and distribution costs to be paid, the Partnership does not believe it will recover its total investment in these films. Apr. 6, 1987 BFI 1986 Annual Report at 2 (Manage- ment’s Discussion and Analysis of Financial Condition and Results of Operations, Operations) (emphasis added).® All of the Partnership’s twenty-three motion pictures were released as of March 31, 1987 and are generating cash receipts from domestic and foreign theatrical exploitation, domestic and foreign home video, pay television and domestic television . . . . Based on estimates regarding the ultimate revenues expected to be generated from all markets for the films re- leased through March 31, 1987 and the addi- tional distribution costs to be paid, the Part- investment in these films. . . . The estimated ultimate revenues for the films as of March * A copy of this report can be found attached as Ex. B to the defendants’ motion. ° A copy of this report can be found attached as Ex. C to the defendants’ motion. iain earaeananiea neal App. 37 31, 1987 total approximately $90,885,000 and the ultimate production and distribution costs total approximately $105,236,000, thus result- ing in an overall net loss of approximately $14,351,000, all of which has been recognized through March 31, 1987. May 14, 1987 BFI First Quarter 1987 Interim Finan- cial Statement at 6 (Management’s Discussion and Analysis, Operations) (emphasis added).’ All of the Partnership’s twenty-three motion pictures were released as of June 30, 1987 and are generating cash receipts from domestic and foreign theatrical exploitation, domestic and foreign home video, pay television and domes- tic television. . . . Based on estimates regard- ing the ultimate revenues expected to be gen- erated from all markets for the films released through June 30, 1987 and the additiona! distribution costs to be paid, the Partnership ment in these films. . . . The estimated ulti- mate revenues for the films as of June 30, 1987 total approximately $87,000,000 and the ultimate production and distribution costs total approximately $104,482,000, thus result- $16,982,000. 7 A copy of this report can be found attached as Ex. D to the defendants’ motion. This report was mailed to the investors in August 1987 (Jan. 6, 1992 Cody Aff. 7] 3-4). App. 38 Aug. 18, 1987 BFI Second Quarter 1987 Interim Financial Statement at 7 (Management’s Discussion and Analysis, Operations) (emphasis added).® The Majeski class argues that supplemental literature portrayed the BFI investment as “safe” and “conservative,” and that “[t]he ‘worst case scenario’ for this investment was a return of capital. A probable scenario would involve a doubling of money and a best case scenario was described as ‘who knows.’ ” Dec. 20, 1991 Br. at 28; see also Feb. 24, 1989 Am. Compl. { 12. The class further argues that “[t]he investors were entitled to assume that the Prospectus contained truthful information . . . the investors believed they were relying on information [contained in the supple- mental literature] consistent with the Prospectus.” Id. at 29-30.° Additionally, the reports were “not incon- sistent with the offering literature, which had told investors some movies may be losers but that modest success by a few, or even by one movie, would make the overall venture profitable, potentially very profit- able, and that the income from a variety of sources for * A copy of this report can be found attached as Ex. E to the defendant’s motion. * The Majeski class emphasizes the following language from the prospectus: “Although the information contained in such [supple- mental) literature does not conflict with any of the information contained in this Prospectus .. . .” Jan. 8, 1985 BFI Prospectus at 69 (Supplemental Literature). That sentence continues: “such material does not purport to be complete, and should not be considered as a part of this Prospectus . . . or as incorporated in this Prospectus . . . or as forming the basis of the offering of the Interests described herein.” Id. App. 39 BFI would nevertheless produce a successful invest- ment.” Id. at 5. The Majeski class asserts that the first time the class members were made aware of any fraudulent - actions was in May-July 1988, when the investors were told: “Based upon the performance of the Part- nership’s films to date, as well as New World’s esti- mates of ultimate revenues from exploitation of the pictures and related expenses, we do not anticipate re- ceiving sufficient net revenues to return all of inves- tors’ original capital.” May 13, 1988 BFI 1987 Annual Report (July 1988 Silverstein [Balcor Chairman and CEO] letter) at 1.'° This discovery date would there- fore defeat the defendants’ argument that Majeski was not timely filed with respect to the one-year prong of the statute of limitations. The Majeski class argues that their position on discovery creates questions of fact as to whether the complaint was filed within one year after the violation was or should have been dis- covered. - The standard for determining when fraud should have been discovered, however, is an objective one: were there sufficient facts to put a reasonable person on inquiry notice of possible fraud. DeBruyne v. Equi- table Life Assurance Soc’y. of the U.S., 920 F.2d 457, 466 (7th Cir. 1990); Hupp v. Gray, 500 F.2d 993, 997 (7th Cir. 1974). This question may be resolved on summary judgment. DeBruyne at 466. 10 A copy of this letter can be found attached as Ex. L. to the Dec. 13, 1991 Kersten Aff. | App. 40 This court finds that there were sufficient facts present in the prospectus itself, and supplemented by the numerous reports which discussed the losses asso- ciated with the released movies, to put the Majeski class on notice that the BFI investment was risky and not in conformance with the representations regarding the investments’ returns which the class alleges were made. There were numerous warnings, conspicuously placed throughout the prospectus, that clearly and specifically discussed the risky nature of the BFI investment. The reports additionally told the investors that the movies were not bringing in money. These warnings, when viewed in light of the optimistic state- ments regarding the BFI investment that the class alleges were made, should have put a reasonable in- vestor on notice that the BFI investment was not “safe and conservative.” Thus, to meet the one-year prong of the statute of limitations, the Majeski complaint had to be filed by May 14, 1988.'' Because the Majeski class knew or should have known of their alleged claim more than one year before the Majeski complaint was filed on October 11, 1988, the Majeski § 10(b) claim must be dismissed as untimely. Thus, the Majeski complaint has no remaining federal claims. The Majeski complaint also included a number of state law claims. On January 18, 1991, this court certified for class treatment the Majeski state law claim for breach of fiduciary duties. This court declined to certify for class treatment the Majeski state law claims of fraud, negligent misrepresentation, misrepresentation - strict 1! Or by August 1988, the last date by which all the plaintiffs received the BFI First Quarter 1987 Interim Financial Statement. See n.7, supra. | ; App. 41 liability, breach of contract and derivative action. The dismissal of all the federal claims requires this court to relinquish its pendent claim jurisdiction and there- fore dismiss this entire action. United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966). The Majeski class also argues that they are not barred by the statute of limitations because the de- fendants actively concealed the fraud by lying about the relationship between BFI and New World, citing Davenport v. A.C. Davenport & Son Co., 903 F.2d 1139 (7th Cir. 1990) (overruled by Short regarding the statute of limitations). The class argues that the de- fendants failed to inform the investors that the Balcor defendants and New World were involved in serious disputes, which eventually led to a settlement agree- ment in the summer of 1987.” The defendants, however, point out that BFI’s Sec- ond Quarter 1987 Interim Financial Statement dis- closed the existence of the settlement agreement. In addition, the settlement agreement is distinct from the alleged “safe and conservative” portrayal of the BFI investment, to which the plaintiffs should have discov- ered the alleged fraud based on the reasons discussed above. The Majeski class also argues that the defendants waived the statute of limitations argument by waiting more than a year after the Short decision to bring their motion. The defendants argue that their answers to the amended complaint, given a few months after 12 A copy of the settlement agreement can be found attached as Ex. N to the Dec. 13, 1991 Kersten Aff. App. 42 the Short decision, stated the statute of limitations as an affirmative defense. This court finds no reason to conclude that the defendants waived this argument. Eckstein The absolute language of § 13 of the Securities Act of 1933 applies to the Eckstein class, i.e. “[iJn no event shali any such action be brought to enforce a liability created ... more than-three years after the sale” (emphasis added). In Short, the court noted that this language “sets three years after the sale as the outer limit for litigation.” Short at 1392. Because the last possible day of receipt of the BFI prospectus and sale of BFI investments was December 31, 1985, the last day to file the Eckstein complaint within the three- year prong of the statute of limitations was December 31, 1988. The Eckstein complaint was filed on Febru- ary 10, 1989, and must therefore be dismissed as un- timely. The Eckstein class also argues that the defen- dants’ fraudulent concealment, as distinct from equita- ble tolling, applies to the statute of limitations. This court finds, however, that the Seventh Circuit law as expressed in Short imposes an absolute three-year limitation on actions brought pursuant to § 10(b) and Rule 10b-5. IT IS THEREFORE ORDERED that the defen- dants’ November 5, 1991 motion fer summary judg- ment is GRANTED and the above-captioned actions are DISMISSED. aN te App. 43 Dated at Milwaukee, Wisconsin, this 11th day of March, 1992. BY THE COURT: /s/ John W. Reynolds John W. Reynolds Senior Judge App. 44 EXHIBIT TO OPINION ‘sU0des jueNbesqns 10; y80\se UB Aq pejuesesde, 0q WWM eHenBue; sy) , soudde sep sii Aj@AND201301 SONdde 8 0) Ajdde $0 88 suOneiuWwy @2ue1e) OU SUONeUWH 40 SUONeUWH JO eINIeI8 ‘A@anDe0s304 40 @)NIeI8 :es Me} 9/q Ajeanseojes SOINieis (Q)O| ‘2 ‘UA EIA L = (QOL © me Aidde 4! @ ‘80889 (9)O| Suipued @ DOYS seydde « O31d11439 MQ suBis juepisesyg (29 ‘s) JUNV1 (39 ‘s) AVI MVW1M3N_ (81M '0'3) VZINSIA ssv19 Og “530 T? INA “O62 INIT 6C INT tlt ww Sl NVF AUANIBONs OPIDepP 0} SeUI/DEP SUONEIIWH 4O 314 LNIVIdWOD eines “JA E/'4A | = (Q)OL © Q3J0NIWV PLZ NIFISIDS (413 42) IQOHS vl AON Ob ATH ‘SIM '0'3 OL O3uu34SNVUL NIISIOS 3114 LNIVIdWOD VINYOSITVD NI G34 SY30HO 13NVd TOW O30N3WV IISSTVN LNIVIdWOD NISISSDI tc ONV ve O34 Ol ‘834 J8uded jeus6y0 40 je NISNODSIM Ni J@A0IOs LOU IM SIOISEAL @ O34 LNIVIdWOD ISISSTVA 43.1137 039/1H0d34 IWNNNV L861 tt L190 AVWTTET AVA PHOM MeN WIM JUeWeEBe JUEWOUIES © UO ZL¢ = SO] leu » VOI PLE = SSO} J0U @ VOW GL¢ = SSO} JEU » e«@® «@ «@ Peseojes seAow £7 |/@ @ POSES/Os SOAOW EZ j/@ @ Peseojes SeAOW FZ 40 Gi Q3SVv313u 1H0d34 Z86L Y3ILYWND PUuZ 14¥0d3H 2861 HALYVNAD 381 140d34¥ IWONNY 9861 S3JIAOW + 8t ‘OAV bT AVW 9 TkdV o J UBLUISOAL! 18102 $3) 4BA0IB4 IM Ut BABIIOG -® 10U SeOP diysseuLEY, @ O3SVv313u 4180d34 9861 YILYVND PE 18H0d3Y 9861 HILYWND PUuZ S3IAOW Si tl “AON tt ONV pesoj> (pesnbey vondussqnsey) 03SV313Y Bu1e40 SMIeds0J4 0} JUBWPUEWY snjisedsoig S3IAOW tt “330 tt LUO 8 ‘Nvf L661 O661 6861 886i L861 986i S861 Ay App. 45 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN JUDGMENT IN A CIVIL CASE RALPH MAJESKI, et al., v. Case Number: 88-C-1079 John W. Reynolds, Judge BALCOR ENTERTAINMENT COMPANY, LTD., et al. OQ} Jury Verdict. This action came before the Court and a jury with the judicial officer named above presid- ing. The issues have been tried and the jury has rendered its verdict. & Decision by Court. This action came to trial or hear- ing before the Court with the judge named above presiding. The issues have been tried or heard and a decision has been rendered. IT IS ORDERED AND ADJUDGED that the defend- ant’s November 5, 1991 motion for summary judgment is GRANTED and this action is hereby DISMISSED. Date March 11, 1992 SOFRON B. NEDILSKY Clerk /s/ Rita Zvers (By) Deputy Clerk App. 46 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN JUDGMENT IN A CIVIL CASE ROBERT ECKSTEIN, et al., V. Case Number: 89-C-1315 John W. Reynolds, Judge BALCOR FILM INVESTORS, et al. QO Jury Verdict. This action came before the Court and a jury with the judicial officer named above presid- ing. The issues have been tried and the jury has rendered its verdict. & Decision by Court. This action came to trial or hear- ing before the Court with the judge named above presiding. The issues have been tried or heard and a decision has been rendered. IT IS ORDERED AND ADJUDGED that the defend- ant’s November 5, 1991 motion for summary judgment is GRANTED and this action is hereby DISMISSED. Date March 11, 1992 SOFRON B. NEDILSKY Clerk /s/ Rita Zvers (By) Deputy Clerk --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_0819%3A1. Public record. Not legal advice.